NY Attorney General Andrew Cuomo has subpoenaed ex-Merrill chief John Thain and Bank of America CAO J Steele Alphin over the bonuses Merrill paid late last December. Cuomo stated: "The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation."

Although obviously bad from a PR perspective, it's still unclear what exactly "warrants further investigation" by the NY AG. One clue: Cuomo is teaming up with Neil Barofsky, the TARP's new special inspector general.

I'm no TARP expert, but I'm not sure how Merrill would be liable. The rules apply to institutions receiving TARP funds (Merrill and BoA: check), but they apply only to "senior executives" i.e., the CEO, CFO, and next three most highly compensated executive officers. Treasury summarizes the standards as

ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;

prohibiting the financial institution from making any golden parachute payment (based on the Internal Revenue Code provision) to a senior executive;

and agreeing not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

I'm not sure how the Merrill bonuses violate these standards--and anyway, the money didn't go to "senior executives."

Still, the bonus decision is one hot potato: Thain, in an email sent Monday, claimed BoA was in on it: "the size of the pool, its composition (cash and stock mix), and the timing of the payments for both the cash and stock were all determined together with Bank of America and approved by our Management Development and Compensation Committee and our Board." Scott Silvestri of BofAm put it all on Merrill: “John Thain and the Merrill Lynch compensation committee made the decision on the amount and timing of year-end compensation at Merrill Lynch. We had no legal right to challenge it.” One theory cited by the WSJ is that because the merger agreement specified that Merrill pay regular bonuses, and "the company was going to cease to exist at the end of 2008, that meant, by definition, that the bonuses had to be paid before the end of the year."